The Review of Financial Studies
Volume 29 Issue 12, December 2016, 3321-3353
 

Ji-Woong Chung,  Byoung Uk Kang
https://academic.oup.com/rfs/article-lookup/doi/10.1093/rfs/hhw052

Abstract
We document strong comovement in the returns of hedge funds sharing the same prime broker. This comovement is driven neither by funds in the same family nor in the same style, and it is distinct from market-wide and local comovement. The common information hypothesis attributes this phenomenon to the prime broker providing valuable information to its hedge fund clients. The prime broker-level contagion hypothesis attributes the comovement to the prime broker spreading funding liquidity shocks across its hedge fund clients. We find strong evidence supporting the common information hypothesis, but limited evidence in favor of the prime broker-level contagion hypothesis. Received September 6, 2014; accepted January 7, 2016 by Editor Philip Strahan.

Keywords: G11, G14, G23, G24